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The Straight-Line Depreciation is Wanted, Dead or Alive

  • Danny Ben-Shahar

    ()

    (Israel Institute of Technology)

  • Yoram Margalioth

    ()

    (Tel Aviv University)

  • Eyal Sulganik

    ()

    (The Interdisciplinary Center Herzliya)

Registered author(s):

    We propose a simple axiomatic system that any depreciation method¡ªcomplying with the core of the accounting of depreciation¡ªmust obey. We show that, while none of the prevalent depreciation methods (e.g., straight-line) ex ante conforms to these principles, the accredited proportional depreciation method not only maintains the axiomatic system, but also, for a plausible family of depreciation methods, is the unique method that complies with the axiomatic system. We further propose two consistency requirements of a depreciation method¡ªpartition consistency and dynamic consistency¡ªand show that, in contrast to the commonly used methods, the proportional depreciation method is the only one to always sustain both. Our analysis may provide further resolution to the arguable evidence on the dominance of Funds From Operations over net income in measuring performance in the real estate industry.

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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol31n03/05.351_370.pdf
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    Article provided by American Real Estate Society in its journal journal of Real Estate Research.

    Volume (Year): 31 (2009)
    Issue (Month): 3 ()
    Pages: 351-370

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    Handle: RePEc:jre:issued:v:31:n:3:2009:p:351-370
    Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
    Web page: http://www.aresnet.org/
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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    1. Hugh O. Nourse, 1994. "Measuring Business Real Property Performance," Journal of Real Estate Research, American Real Estate Society, vol. 9(4), pages 431-444.
    2. Jeffrey D. Fisher & Brent C Smith & Jerrold J. Stern & R. Brian Webb, 2005. "Analysis of Economic Depreciation for Multi-Family Property," Journal of Real Estate Research, American Real Estate Society, vol. 27(4), pages 355-370.
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